In France, investors get the centrist limbo they wanted
Summary
Polarization has for years left the country’s politics stuck in an unpopular middle ground, and the latest elections won’t change that. But it does serve to lower the key risks that financial markets were worried about.
When it comes to France’s turbulent politics, the current impasse is probably the best investors could have hoped for.
The second round of French legislative elections delivered a widely expected hung parliament, but not its predicted makeup: Rather than coming in first, Marine Le Pen’s far-right and anti-immigrant National Rally finished third. In a shock twist, the leftist New Popular Front alliance emerged victorious, with the party of President Emmanuel Macron and its allies in second place.
This is because leftists and centrists ended up coordinating. In many local races, candidates dropped out to avoid dividing the vote against the far right. Still, no party has an outright majority, which plunges the country into political gridlock. This was, counterintuitively, the preferred outcome for financial markets.
The CAC 40 initially tumbled when the elections were called in June, driven by fears of a potential National Rally government challenging the European Union with fiscally expansive plans. Then the French stock benchmark perked up, as the first-round results suggested that the far-right wouldn’t get a majority.
Yet markets remained volatile because the rise of the New Popular Front raised even greater concerns. The policies of this coalition, in which leftist firebrand Jean-Luc Mélenchon is a key leader, also include more government spending, on top of widespread tax increases.
On Monday, the CAC 40 initially dipped. Investors may have been reacting to Mélenchon’s statement that there will be no deals with the centrists. But it quickly rebounded, with a small gain in early-afternoon trading compared with Friday’s close.
This latter reaction makes more sense. Yes, there are doubts about how France will handle its budget deficit, which amounted to 5.5% of gross domestic product in 2023 and has forced the EU to launch an “excessive deficit procedure" against the country. Macron may need to accept the reversal of reforms such as a higher retirement age.
Still, a fiscal crisis isn’t in the cards, because the European Central Bank is ultimately in control of France’s bond market.
As for economic growth, it is unclear how much impact Macron’s policies have had in the first place, particularly given resistance from unions and swaths of the public, which resulted in the famous “yellow vest" protests in 2018 and 2020.
What matters for sectors battered in the stock market, including banks, energy firms and infrastructure operators, is that the risk of widespread tax increases, nationalizations and a prolonged standoff with Brussels seems smaller now than a few weeks ago. Whatever Mélenchon says, the left will either have to compromise or else form a minority government that might scare investors but wouldn’t be able to pass laws.
So there isn’t much justification for the lower valuation of lenders such as Société Générale and especially BNP Paribas—one of Europe’s most interesting banks that now trades at 0.66 times tangible book value. The same is likely true for firms such as energy utility Engie and infrastructure-concessions leader Vinci, which have lost 7% of their market value since the end of May.
These elections are more a symptom of Macron’s weakness than its cause. After a chaotic month, French politics is back where it has been for years, with a rising far right forcing the left to back a centrist platform that can achieve little because few people actually like it. Macron himself became president on an anti-Le Pen ticket, but in seven years has failed to rally broad support for his pro-business vision.
This could eventually make Le Pen’s victory inevitable, as she claimed after initial results came in. For now, though, it is more or less what markets ordered.
Write to Jon Sindreu at jon.sindreu@wsj.com
